Reaction to everything but the hike

Yellen’s speech at her penultimate Fed meeting was the main mover for the dollar yesterday afternoon, but not because of the widely anticipated 0.25% rate hike.

The outgoing Federal Reserve Chair claimed there was “considerable uncertainty” around the impact of the proposed tax cuts. Her comments, along with an unchanged rate hike forecast, caused the dollar to weaken by a cent against both sterling and the euro over the course of the day. Also, the greenback was already on the wane after US core consumer price data showed slowing inflation earlier in the morning.

There was however a glimmer of hope for the dollar after details of the GOP tax plan emerged from Senate and House Republicans yesterday. The hope is to have the bill signed into law before Christmas. Its progress will be very closely watched as any delays could cause concern for the dollar.

Today the focus shifted momentarily to US retail sales which rose more than projected. These figures reflect a strengthening economy and help the case for more interest rate hikes next year.

Brexit stage left

Prime Minister May was left red-faced by a minor rebellion from a small but pivotal group of conservatives after MPs backed an amendment to give parliament a vote on the final Brexit bill.

Although the vote will not have much effect on the way the government implements Brexit, it could create new problems for a government struggling to show a unified front and a Prime Minister leading an increasingly fractured party.

Interest rates remained unchanged in the UK after BoE members voted unanimously to keep rates at 0.5% despite another very high inflation reading of 3.1% on Tuesday. The Monetary Policy Committee hinted at “modest increases” in interest rates over the next few years with some predicting a hike in Q3 of 2018.

UK retail sales surpassed expectations in November, mainly due to Black Friday bargain hunters and sales of electrical household appliances up 8.6%. However this may have a negative knock on December’s retail sales if consumers have done the majority of their Christmas shopping already.

Draghi drags his feet

The ECB voted to leave interest rates at current levels with the previously announced reduction in asset purchasing starting in January.

Euro spiked briefly after Draghi announced an upgrade in the ECB’s growth forecast for 2018 and 2019. However, with inflation still below the 2% target, the move higher was short-lived. Improved economic activity from Germany and France, the EU’s two biggest economies, is turning the pressure up on Mr. Draghi. But, the ECB has been resilient in not changing interest rates until its quantitative easing program is completed.

Prior to the meeting we had a smorgasbord of data from the Eurozone providing mixed results, including unsurprisingly strong manufacturing figures from Germany and a slightly worse than expected inflation reading from France.

Have a great day,

Alex Fitzpatrick, The WorldFirst Team